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Incidence of Gas Tax:

An issue arose in the Comments on my earlier post on suspending the gas tax regarding the tax incidence of this tax. The basic economics of taxes is straightforward--if the demand curve is relatively more inelastic then the supply curve the consumer ends up bearing the greater proportion of the cost of the tax. So if the tax is increased on a product with an inelastic demand curve, most of the cost of the tax will be passed onto consumers (cigarettes being the typical stylized example that is used). Similarly, if the tax on a product with an inelastic demand curve is reduced, then most of the tax cut will be passed on to consumers as well.

So to determine whether a gas tax moratorium will reduce prices depends on the relative inelasticities of supply and demand over the relevant time period.

This is an empirical question, and one on which there seems to be relatively little research. I've found two recent papers that suggest that consumers and suppliers each pay about half of the federal gas tax and that consumers pay a higher percentage of state sales tax (in one study, all of it). Chouinard and Perloff find that consumers and wholesalers each pay about half of the federal gas tax and that consumers pay all of the state gas tax. They argue that the reason for the difference is that the elasticity of supply is greater for state taxes because wholesalers can shift supplies among states more easily than at the national level. Consistent with the finding that consumers pay most of the state gas tax, a paper by Doyle and Samphantharak studied the impact of the suspension and then subsequent reinstatement of a 5% gas tax in Illinois and Indiana and concluded that retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatements (the differences between the 3% fall and 4% increase were not statistically significant). They also concluded that some evidence suggests that the tax increases are associated with higher prices up to an hour's drive into neighboring states. Because they were looking at specific state-level gas taxes, they don't provide a separate estimate of the incidence of federal gas taxes.

So from what I have found in the sparse empirical literature, probably the best estimate is that about half of a federal gas tax moratorium would be passed on to consumers and about half would be borne by wholesalers.

Ron Hardin (mail) (www):
Except that when the gas tax reduction is discussed, it's in a period of choked supply, so the supply curve is the inelastic one. They're selling all the gas. A higher price doesn't produce any more, and a lower one doesn't produce less.

Instead, the price rises until demand falls to meet the fixed supply. That single market-clearing price to the consumer is the price of gas, regardless how much of it is tax. The consumer pays the same. Therefore the tax money is taken from, or given to, the seller's side.
8.2.2006 1:03pm
kristof (mail):
I think the gas tax is actually quite nice: there are options available for changing behavior (buy a smaller car, use the bus, use a bike, carpool, etc) for avoiding the cost. The money collected by it pay for highway maintenance, which seems like a fair way to pay for it.
8.2.2006 1:19pm
Nanonymous:
Temporary repeals of gas taxes typically happen when prices spike (such as the Illinois/Indiana study), which means that they generally coincide with consumer agitation about "greedy" gas companies. Not dropping the price of gas by approximately the amount of the tax repeal would risk more draconian political steps, even if the cost of the state tax is more evenly split between producers and consumers.
8.2.2006 1:19pm
A.S.:
They're selling all the gas.

Do you have any statistics to back that up? It appears to me that stocks of gasoline are exactly the same now as they have been for the past 20 years. If "they're selling all the gas", you would expect stocks to be down, no? Is there a different statistic I should be looking at?
8.2.2006 1:21pm
cbsimkins (mail):
Consumers pay all taxes, either directly or indirectly. Corporations are not in the business to lose money or to generate returns below a certain premium. The elasticity or inelasticity of supply/demand curves have nothing to do with how taxes or fees are ultimately paid. When costs of doing business are deducted from corporate taxes, the deficit is always spread across the tax base as a whole. So to claim the wholeseller is paying taxes is untrue; the taxes are spread across the taxbase rather than targeted to the consumer of the product.

CBS
8.2.2006 1:52pm
Anonymous Jim (mail):
Well assuming you are right about the reduction in price by eliminating the tax temporarily, here is one political reason why it is a bad idea: Try explaining to people that you are reducing taxes by (about) $0.19 and have them see prices reduced by only $0.10. Notwithstanding any economic realities, my guess would be that a majority would think the other 9 cents is lining oil companies pockets. What happens if half way through this political ploy, ExxonMobil comes out with a new record quarterly profit?
8.2.2006 2:15pm
Indian 84 (mail):
You didnt learn all those big words at Dartmouth.
8.2.2006 2:25pm
Huck (mail):
There have been hefty gas taxes in Europe, for many years. Today in Germany, last I noticed was 1.37 Euro/litre, what translates to about 4.15 $/gallon, if I did use my calculator right.

The gas tax in Germany is 0.65 Euro/litre, or about 1.97 $/gallon. (You have to add a sales tax of 16%, which applies to the final price.)

The public is accustomed to it.
8.2.2006 2:52pm
Huck (mail):
1.37 euro/litre is the final price at the station.
8.2.2006 2:53pm
Huck (mail):
The irony is, since a large part of the final price is tax which stays constant, gas prices are rising (relatively) much less here.
8.2.2006 3:05pm
Huck (mail):
Sorry. I did not use my calculator right. I used 1.25 euro/$. It is the other way round.

The final station gas price here is 6.47 $/gallon. The gas tax is 3.07 $/gallon.

The irony stays the same.
8.2.2006 3:20pm
jimbino (mail):
Wouldn't it make more sense to kill the tax on cigarettes? That would benefit the smokers and along with them the rest of us, who already get a free ride on their Social Security and Medicare Taxes, since they most die before laying claim to much in the way of benefits.
8.2.2006 3:24pm
Zywicki (mail):
Indian 84:
Don't you know I learned all my fancy words in my final year at Dartmouth when Freedman became president. I also started playing the cello and translating Catullus. Fortunately I had one year of enlightenment from the preexisting darkness through which you suffered.
8.2.2006 3:57pm
Mike99:
I agree with CBS.

Why is a tax any different from another expense? In other words, who "pays for" janitorial services or electricity or printer cartridges at Ford's corporate headquarters?

All expenses are borne by the end consumer, and the suppliers decide how much of a profit they can make. If taxes go down, but prices do not follow, it means that the market will bear higher prices. If taxes go up, but prices do not follow, it means that the market will not bear higher prices.

Or look at in a different way: what if I can produce widgets cheaper than my competitor, but sell them at the same price? Does that tell us anything about whether the end consumer bears the costs of my competitor's inefficiencies?
8.2.2006 4:10pm
Ron Hardin (mail) (www):
A.S. that's inventory. The price has to match demand to production rate.

As I said (but with a typo) before, the guy at the tank farm notices that inventory is falling. He can't get gas in faster because (example) Katrina has taken out all the slack and everybody's inventory is falling. So he raises the local price to slow outflow.

Result, the inventory stays put, but the outflow now matches the inflow, and the price is much higher at the pump.

The price controls the flow, not the amount of inventory. The inventory is the same.

That price, what the consumer sees, is the same whether you tax more or tax less in addition, because supply is not affected until they get some more slack back into the production.

The profit on what they're selling is so high that no further incentive produces any additional (short term) gasoline. (Long term, it adds all the costly and difficult-to-extract gasoline, but that takes a while.)

That's why, in a time of shortage, exactly the time that calls for gasoline tax repeals come up, it's exactly what will not work. What works is what in fact happens, the price goes up.
8.2.2006 4:45pm
JDS:
A purpose of taxes is to capture "external costs". In the case of gasoline taxes, some tax to account for pollution and congestion is appropriate - perhaps a few cents per gallon.

But there is much disagreement on external costs assignable to automobiles - for example some writers have computed a social cost on the paving-over of our continent, and argued for taxes on gasoline of few dollars a gallon.

If you believe that the 20 lbs of CO2 produced by burning one gallon of gasoline will lead directly to the end of the world by global warming, then you would favor an extremely high tax rate -- one that actually cuts gasoline consumption.
8.2.2006 8:32pm
Lev:

Consumers pay all taxes, either directly or indirectly.


If memory serves, Connecticut imposed a tax on corporations of some sort and in the same statute attempted to prohibit corporations from passing the tax on to consumers. The latter part of the statute was determined to be unconstitutional, state const. probably.
8.3.2006 1:44am
Lev:

It appears to me that stocks of gasoline are exactly the same now as they have been for the past 20 years. If "they're selling all the gas", you would expect stocks to be down, no? Is there a different statistic I should be looking at?


As I said (but with a typo) before, the guy at the tank farm notices that inventory is falling. He can't get gas in faster because (example) Katrina has taken out all the slack and everybody's inventory is falling. So he raises the local price to slow outflow.
8.3.2006 1:45am
Lev:

It appears to me that stocks of gasoline are exactly the same now as they have been for the past 20 years. If "they're selling all the gas", you would expect stocks to be down, no? Is there a different statistic I should be looking at?



As I said (but with a typo) before, the guy at the tank farm notices that inventory is falling. He can't get gas in faster because (example) Katrina has taken out all the slack and everybody's inventory is falling. So he raises the local price to slow outflow.


There is a point in both of those. If gasoline inventories are the same now as then in absolute terms, gallons, then they are way below now as compared to then in terms of the size of the market. The percentage that inventory is of the total gasoline market is much lower.

That would happen because of "just in time" manufacturing and delivery to reduce the cost of inventory. The theoretical ideal, from a corporation cost reduction viewpoint, is that there is no inventory - the gasoline goes into the truck as soon as it comes out of the refinery unit. Practically, there must be some inventory to buffer as delivery rates are not always constant.

Much lower, percentage of inventory compared to demand, inventory makes the system more susceptible to upsets, and thus to price fluctuations, namely upwards.
8.3.2006 1:50am
Kevin L. Connors (mail) (www):
I did this as a post on my own blog here:

We should sharply increase the gas tax! And then (here's the novel part) actually spend the money on our roads!

It's time for the central planning zealots out there to admit that, for the vast majority of things Americans buy an automobile for, nothing does it better than a personal (or perhaps family) automobile. And they should stop trying to make the personal automobile do things it doesn't do well - like being a cooperative jitney (read carpool), or trying to make other things - like railroad trains - do what it does so well.

In fact, the private automobile does what it does so well, that even after three decades of the planners' stealing the money automobile users pay to assure their right to freely use their automobile, and then spending it on all their pet projects - as well as all the planners' efforts to usurp the private automobile users' freedom to use their cars as they please... all these things which, compounded, make operation of a private automobile - particularly in urban areas - a frequently unpleasant or, even maddening, chore, the vast majority of Americans still resist their plans. Further, those compelled to participate in the planners' misbegotten schemes (the overwhelming majority of those who participate at all) aspire, NO! even lust, after joining the ranks of the private automobile users.

So... imagine that folks... triple or quadruple the current federal (and generally, state) highway transportation funds, actually spent on highway transportation! We could have those multiple deck expressways through urban areas (built to the standards of Germany's Autobahn, not the silly putty crap we have here). We could have those "smart" roads. (Or, more likely, a network of smart cars on a dumb highway, with the dumb cars relegated to the slow lanes.) We could even have driver training courses that actually train our kids to drive - imagine that!

Kevin L. Connors
WestPundit
8.3.2006 3:49am
Kevin L. Connors (mail) (www):
Oops, revise last sentence to read: "We could even have driver training courses (no doubt privately operated, and funded by vouchers) that actually train our kids to drive - imagine that!"
8.3.2006 4:11am
dew:
"(Or, more likely, a network of smart cars on a dumb highway, with the dumb cars relegated to the slow lanes.)"

I have difficulty understanding how "a network of smart cars on a dumb highway" could be done through gas taxes without far more central planning than we have today.

Here in MA, despite central planning tendencies in many other areas, much (most?) of the gas taxes gets transferred to the local municipalities' coffers in a way that specifically requires that it gets used for repairing roads. The towns have almost complete control over how it gets spent, as long as it is for roads/bridges/etc.

I would easily support a higher gas tax here if it could be expanded to cover more local highway department expenses (equipment purchases, snow removal, etc). Vouchers for driver training courses are also an interesting idea.
8.3.2006 2:26pm
dew:
To answer my own question, I suppose increased gas taxes could be used to fund a tax credit for smart cars, which would increase the use of smart cars (when they really exist) without more central planning.

Even government-sponsored research in smart car technology, which I personally would not especially mind, would be at least a minor example of central planning.

BTW, my own proposed changes for federal gas tax would be to increase it significantly, but subtract any (or most of any) state gas tax that is earmarked for transportation funding. That would quickly remove most of the silly federal redistribution/ earmark porkfest, which of course probably makes it impractical (Note, I have no idea whether other states distribute gas tax money in any reasonable way, but it cannot be too much worse than the federal distributions).
8.3.2006 5:00pm
Kevin L. Connors (mail) (www):
Government would have a role in the following... 1: giving the "smart car" standards created by an industry association (say, the SAE) the force of law. (For a analog, think building codes.) 2: building roads that, while dumb, meet standards which the smart vehicle manufacturers say are required for their vehicles to operate properly on. And 3: enforce a prohibition against dumb vehicle operators intruding onto the smart vehicle lanes.
8.4.2006 3:41am